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New Policy for Dry Bulk Cargo for Major Ports from August 20

NEW DELHI – To increase efficiency of major ports, a new berthing policy for dry bulk cargo will be in place from August 20, the government said today.

“Ministry of Shipping has formulated a new Berthing Policy for Dry Bulk Cargo for all major ports which will come into effect from August 20, 2016,” Ministry of Shipping said in a statement.
The objective of the new policy is to provide a standardized framework for calculation of norms, specific to the commodity handled and the infrastructure available on the berth besides driving higher productivity and achieving near-design capacity of the available equipments/infrastructure, it said. throughput using the available infrastructure in major ports, the statement, said adding it will improve utilization of port assets and create additional capacity without any significant capital investment.

Further, the policy aims at increasing competitiveness of major ports by creating value for the trade through reduced logistics cost and at reassessing the capacity of the berths based on the expected performance of the berth equipments and vessels derived from performance norms. “All the major ports will be holding trade meetings between July 1 to July 18, 2016 to sensitize the norms, incentives, penalities and charges to be implemented,” it said.

Dry bulk cargo currently makes up over 26 percent of the cargo handled at the 12 major ports while growth in coastal shipping is expected to add about 100-150 million tonne per annum (MTPA) of additional dry bulk cargo at ports by 2020-25. Recent benchmarking of ports’ performance across key dry bulk commodities has identified significant scope for improvement of productivities in-comparison to best-in-class peers, the government said.

The low productivity has contributed to high turn-around times in addition to resulting in higher berth occupancy levels across major ports, it added. Furthermore, low productivity prevents ports from being able to utilise the full capacity of exiting assets, thereby directly diminishing return on investment for ports, it said.

“Significant productivity improvements are therefore necessary at major ports not only to ensure additional dry bulk cargo throughput, but also for avoidance of CAPEX in additional capacity creation,” it added.

The government said at present performance norms are not being used optimally to improve productivity at many major ports.

India has 12 major ports — Kandla, Mumbai, JNPT, Marmugao, New Mangalore, Cochin, Chennai, Ennore, V O Chidambarnar, Visakhapatnam, Paradip and Kolkata (including Haldia) which handle approximately 61 per cent of the country’s total cargo traffic.

 

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Changing Alliances for Container Market

Changing Alliances for Container Market

New Mergers in Shipping Companies

CMA-CGM, world’s No.3 shipping company, has confirmed its decision to purchase APL while COSCO simultaneously enclosed deals to acquire CSCL’s container division. As of 2016, APL (G6) and CSCL (O3) will continue business under their respective alliances for the time being, but more changes are expected in 2017.

- Once M&As are complete on both sides, CMA-CGM and COSCO will have a increased market share of 11%, 8% respectively. This puts COSCO as the 4th largest global shipping company, surpassing Hapag-Lloyd in terms of market share.

<Global Container Market Share by (2015.07)>

Description

2M

CKHYE

G6

O3

ETC

North America Bound

MSK 9.6%

MSC 4.6%

HJS 7.5%

COSCO 7.8%

EMC 9.8%

YangMing 4.5%

K-Line 6.0%

HPAG 5.3%

HYK 4.2%

OOCL 4.9%

APL 6.9%

MOL 5.2%

HMM 4.1%

CMA-CGM 7.5%

CSCL 2.6%

UASC 1.7%

7.7

Total

14.3%

35.6%

30.6%

11.9%

7.7%

Europe Bound

MSK 19.0%

MSC 16.3%

HJS 4.8%

COSCO 5.9%

EMC 6.2%

YangMing 4.1%

K-Line 2.9%

HPAG 4.4%

HYK 3.1%

OOCL 2.3%

APL 3.3%

MOL 2.9%

HMM 2.4%

CMA-CGM 10.9%

CSCL 5.8%

UASC 4.5%

1.4%

Total

35.2%

23.8%

18.4%

21.1%

1.4%

Vessel Ratio (%)

28.5%

17.0%

18.4%

14.7%

1.4%

Source : Alphaliner

Projected Changes in Market Share

North American routes are largely under CKHYE (35.6%) and G6 (30.6%) while European routes are mostly taken by 2M(35.2%) and O3 (21.1%).

- Though final decisions are yet to be made, by 2017 projections show that APL’s shift will cause O3’s (11.9%) share increase to 18.8% in the North American trade route and CSCL’s shift will result in CKHYE’s (23.8%) share increase to 29.6%. This implies that G6’s share will decrease from 30.6% to 23.7% (North American Route) and 18.4% from 15.1% (European Routes) suggesting a major change in market share by alliance.

The two hefty M&As last year will not just change alliance landscape but also strengthen the companies that initiated the M&A. CMA-CGM’s market share in the North American routes will increase from 7.5% to 14.4%, and COSCO’s market share in European routes from 5.95% to 11.7%, strengthening company position in their each respective zones.

In overall perspective, 2M will maintain its position as the largest alliance, G6 will shrink to G5 followed by reduced market share, and O3 will also see slight cuts. The largest beneficiary of such change is CKYHE alliance of COSCO, with an impressive increase of 16.9% to 20.4%, making it the only alliance with greater market share than before.

- Major company’s in and out of an alliance leads to fundamental changes such as fleet composition, calling ports and other maritime services. Such implications, along with the recent merger of major shipping companies, may suggest an opportunity for a new alliance.

< Freight space and Market Share by Alliance >

Alliance

Freight Space (1,000 TEU)

Market Share(%)

Description

2015

2017

2015

2017

2M

5,687

5,687

28.7

28.7

 

CKYHE

3,351

4,046

16.9

20.4

CSCL transfer

G6

3,485

2,948

17.6

14.9

Become G5

O3

3,015

2,858

15.2

14.4

APL transfer

Source : Alphaliner

Maritime alliances show that economies of scale brings reduced costs at a significant level and thus can use it as leverage to pinch more market share. Such benefits is expected to leverage more momentum on the M&A recent trends.

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 285

Removal of sanctions in Iran eases burden for Oil Tanker Market

Removal of sanctions eases burden for Oil Tanker Market

Oil Tanker Market

Iran’s efforts to grow oil exports are likely to increase seaborne trade volumes, offsetting some pressure on the oversupplied tanker market.

- Mehdi Asali, OPEC’s Iranian Representative, said on Jan 16th that Iran is ready to boost crude oil production 500,000 barrels per day (bpd) once sanctions are lifted with a follow up increase of another 500,000 bpd in the near future. Markets anticipate a swift recovery in Iran’s crude oil production.

- Estimates show that resuming pre-sanction levels will lead to increased seaborne cargo volumes 5~30% higher than Iranian VLCC deployment. Even if production schedules are not met, abundant stockpiles are likely to be used to maintain momentum. Forecasts advise this will have a positive effect on Middle-East bound VLCC rates.

Global Oil Prices

Iran’s return has heaped further pressure on oil prices and competition among Middle-Eastern supplier

- Sinking spot prices suggest expanding oil storage demand, therefore partially countering the oversupply in tanker markets by absorbing excess VLCC fleets.

Iran’s Oil Export and Production

Projections show that Iranian oil exports will gradually recover to pre-sanction levels between 2.3 to 2.5 million bpd, rising proportionately with oil production levels.

- Pre-sanction oil production in Iran was approximately 4 million bpd and over 60% of crude oil produced were exported abroad. Current export ratio stands around 45% which is about 1.5 million barrels exported per day. Recent Iranian commitments are likely to push scales further.

- Overall export is expected to increase 0.8 ~ 1 million bpd corresponding to 23~28 VLCC vessels.

- Current Iranian oil reserves are estimated to be 60 million barrels. If production continues to grow at a steady 10%, Iran will have exhausted its stockpile by the end the year.

이란 석유 수출 - 표

Outline of Iran’s Vessels

Iran possesses 37 VLCC vessels representing 5.7% of the global VLCC portion. Excluding the vessels used for long-term transport and storage leaves Iran with roughly 20 VLCC vessels ready for deployment.

- Insurance companies in Europe refused to accept Iranian registered ships due to economic sanctions since 2012. Hence, majority of VLCC vessels were utilized as storage tanks or sailed on limited courses to Asia such as China, Japan and India.

- Iranian VLCC fleets are expected to return to the already saturated tanker market as the surge in oil exports continue, adding 7% increase in estimated 2016 VLCC supply.

- Estimates suggest the influx of Iranian VLCC fleets to bring further pressure on declining shipping rates as it increases the 30-day carrier waiting cue by 10% (extending yearly average to 110 ships) in the Persian Gulf.

이란 석유 수출 - 표2

Author: Yoon Jae-Woong, Maritime Shipping History Research Department – Analyst
Source: KMI Shipping Market Trend Focus, No. 284

Long-Term Transport Contracts Bring Benefits to Shippers, Too

Long-Term Transport Contracts Bring Benefits to Shippers, Too

 

BDI reached 498p, the lowest ever, on November 20th, and has since remained around 500-599p. Thanks to the continuing low freight rates due to an oversupply over an extended period, shippers are reaping benefits from lowered transport cost, whereas carriers have no choice but to operate their ships at the risk of sustaining a big loss due to a freight rate that fails to cover variable operation costs.

With low freight rates being protracted, the transport-related decision-makers with shippers even question the need for a long-term transport contract, which incurs a relatively burdensome cost. In turn, concerned about landing a low-rate long-term transport contract when their negotiation power over freight rates is compromised by an oversupply, some of the carriers negatively view the option.

All along, a long-term transport contract has been perceived as a standard method for averting volatility risk (such as change in freight rate). Moreover, since long-term transport contracts have greatly benefited carriers’ business as a basis for their stable income, shippers have been urged to sign a long-term transport contract with national carriers for the purpose of overriding the on-going depression.

Long-term transport contracts that appeal to shippers’ patriotism only may not be so sustainable to shippers who set great store by profitability. This means that a long-term transport contract can become valid only when it is recognized as a transport strategy that is economically reasonable from the perspective of actual experience in the shipping market.

 

Cost and volatility reduction with long-term transport contracts

The economic rationality of a long-term transport contract can be tested in various ways, and its validity can be demonstrated from the perspective of what it costs a shipper to get a vessel. For this purpose, we consider six-month charter a short-term contract and 3-year charter a long-term contract and have analyzed the data for time charter cost for a 150,000 DWT capesize vessel.

From 1992 through this year, the average cost for getting a ship lined up shows lower for a long-term contract than for a short-term contract. While the average cost for getting a ship through a three-year charter contract costs 23.24 million dollars for each of the three years, a six-month charter contract costs 29 million dollars.

The standard deviation in time charter cost shows 66% lower for a long-term contract than for a short-term contract. This shows that the volatility risk is smaller for a long-term contract than for a short-term contract.

<The three-year cost for getting a vessel for 6-month charter and 3-year charter between 1992 and 2015 (150,000 DWT vessel)>

The three-year cost for getting a vessel
for 6-month charter
The three-year cost for getting a vessel
for 3-year charter
Average cost
(million $)
29.00 23.24
Standard
deviation
24.26 14.60

 (source: Clarkson, KMI)

 

A long-term contract exerts greater effect during a boom

Meanwhile, for long-term and short-term contracts, the vessel acquisition cost varies with business cycle. As you see in the figure below, in the low-BDI period (in a depression), the vessel acquisition cost on a short-term contract (the vessel acquisition cost for a six-month charter) is relatively low, whereas in the high-BDI period (in a boom), the vessel acquisition cost on a short-term contract is relatively high.

In a nutshell, we can see that we find no big difference for the vessel acquisition cost in a depression between a long-term and a short-term contract, whereas we find that the vessel acquisition cost is significantly greater for a short-term contract that for a long-term contract.

<The 3-year trend along the boom-and-bust cycle for the vessel acquisition cost for 6-month charter and 3-year charter (150,000 DWT vessel)>
The 3-year trend for the vessel acquisition cost

(source: Clarkson, KMI)

 

The analysis shows that the vessel acquisition cost is lower for a long-term contract than for a short-term contract, which means that long-term contracts benefit shippers. Moreover, as it shows less volatility, a long-term contract is accompanied with less market volatility.

Meanwhile, it is true that bad times financially motivate shippers to reduce the vessel acquisition cost through a short-term contract. However, if supply is reduced through vessel overhauling and reduced orders caused by depression and a boom is thereby created, the vessel acquisition cost for a short-term contract may increase again.

In other words, from a broader perspective that encompasses both good times and bad times, the vessel acquisition cost can be reduced through a long-term contract, which will deliver benefits to shippers.

 

Achieving carrier profitability needs a measure for making up for cost of revenue

By the way, we should note that the above findings haven’t come out of a simple theoretical analysis or test but is grounded in the experience of the dry bulk carrier market. In other words, history and experience tell us that a long-term transport contract is an economically reasonable solution that provides shippers with the benefits of cost reduction and diminished volatility.

Meanwhile, while a carrier benefits from reduced market volatility caused by a long-term transport contract, the catch is that a contract concluded in bad times brings in a low freight rate, thus failing to achieve profitability. Carriers’ fear of a low-rate long-term transport contract is something that can be addressed by implementing a measure for making up for cost of revenue.

Thus, we may conclude that a long-term transport contract which includes an appropriate measure for recouping cost of revenue makes a win-win strategy for ship-owner and shipper.

 

 

 

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 281

Implications of Maersk’s Restructuring for Shipping Market

Implications of Maersk’s Restructuring for Shipping Market

 

Maersk_logo

Maersk announces a restructuring plan

In early November, Maersk, the global leader in shipping, announced an aggressive restructuring plan to reduce cost by making its organization slimmer and reducing investment in new vessels for next two years. Maersk’s plan charted three things to do: manpower reduction, vessel investment reduction, and service route reduction.

Maersk plans to cut 4,000 employees out of its land-side operation staff of 23,000 people through attrition and through an organizational reshuffle by the end of 2017, while it plans to improve work efficiency and customer service through work automation and digitization. The company further expects to reduce costs by 400 million dollars (150 million dollars in 2016 and 250 million dollars in 2017 as selling, general and administrative expenses).

Maersk aims to reduce vessel capacity by giving up the option for constructing new vessels and delaying ship delivery. Maersk canceled its options in its contracts with Daewoo Shipbuilding & Marine Engineering (DSME) for building six 19,640 TEU vessels and with COSCO Shipbuilding Industry Company for building two 3,600 TEU feeder vessels, and postponed exercising its option in the contract with Hyundai Heavy Industries for building eight 14,000 TEU vessels.

Furthermore, Maersk recently suspended its four services of ME5, AE9, AE3, and TA4, which the company had provided in partnership with MSC, and is going to stop 35 more voyages in the fourth quarter. Moreover, the company considers laying up one 18,000 TEU vessel for six weeks and is mulling over a plan to idle more ultralarge vessels.

 

The foreboding outlook for shipping market in the backdrop

Maersk realized a better-than-expected profit in the first half-year, but saw a sharp decline in its performance in the second half-year, which seems to have prompted the establishment of the extraordinary plan. Maersk came up with such a massive restructuring plan, because the container market is expected to get worse, leading to a decline in profitability.

As a cost leader for global shipping market, Maersk has shown its determination to respond to oversupply by reducing vessel capacity and diminishing and reorganizing services instead of implementing restructuring just to reduce costs.

 

Strategic shift toward mitigating oversupply

A correct reading of this should be that having triggered cost-based competition by deploying the world’s first 18,000 TEU vessel, Maersk has thereby revised its erstwhile strategy which was focused on preempting the shipping market and maintaining its status as the industry’s leader. As Maersk’s cost leadership strategy has started the craze among its competing carriers for ordering ultralarge vessels and thereby instigated an oversupply in the global container shipping market, thus increasing the likelihood that the company will end up a victim of the cost-based competition. While Maersk has performed a leading role in changing the mode of competition in the global container shipping market, the company’s strategy has practically failed, in that the extreme cost-based competition has caused a depression in the shipping market that is the severest ever in history.

 

Strategy should be created for balancing demand and supply

For last several years, the global container shipping market has been involved in an extreme cost-based competition, which should be noted in that it has dragged the market through a bottomless depression. It takes spontaneous restructuring to safeguard the carriers’ interests in the current market which is dominated by shippers.

Especially, a restructuring shouldn’t stop at workforce reduction but has to be implemented with a view to achieving a significant balance of demand and supply by focusing on reducing vessel capacity and services and idling vessels.

 

 

 

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 280

Factors That Will Control Future Container Shipping Market

Factors That Will Control Future Container Shipping Market

This year, the container shipping market has seen a depression that is worst ever in history, while countless shipping-related organizations do not see a brighter future for the market. Looking at the factors that will drive the container shipping market for next several years, one sees more of negative than of positive factors. Major factors can influence future container shipping market. While the establishment of low growth for global economy and the start of a medium-growth Chinese economy virtually rule out any drastic increase in container cargo volume for export and import, oversupply will be aggravated by continuous increase of ultralarge vessels of minimum 18,000 TEU and the completion of Panama Canal expansion.

 

Low growth for global economy

Lately, the multiplier between global economic growth rate and the container cargo volume is dropping continuously. In 2006, with global economic growth rate at 4.2% and cargo volume increase rate at 11.2%, the multiplier was 2.7. In 2010, with global economic growth rate at 4.3% and cargo volume increase rate at 13.1%, the multiplier amounted to 3.1. And in 2016, with global economic growth rate at 3.3% and cargo volume increase rate at 5.4%, the multiplier will sharply drop to 1.6 (Clarkson, IHS). This means that even if global economy recovers, the container cargo volume is not going to increase as sharply as it did before by a long shot.

<The multiplier effect between global economic growth and container cargo volume increase>

The multiplier effect between global economic growth and container cargo volume increase

The multiplier effect between global economic growth and container cargo volume increase

 

An era with a medium-growth Chinese economy

Since the first quarter of 2013, China, the largest customer for the global shipping market, had kept its economic growth between 7% and 8%, which dropped to 6.9% in the third quarter of this year, thus showing that its economy entered the era of medium growth. Especially, Chinese export continued to dwindle except in February, registering a significant slowdown in the container cargo volume for North American and European routes.

According to Clarkson and Zepol, Chinese container cargo volume for export increased 6.3% for North American routes and 6.9% for European routes in 2014. As of August, however, it grew only 2.3% for North American routes while decreasing 4.1% for European routes.

<Chinese export cargo volume for ocean routes>

North America Europe
2011 8,114 9,921
2012 8,234 9,530
2013 8,496 10,164
2014 9,030
(+6.3%)
10,860
(+6.9%)
2015
(Jan~Aug)
4,316
(+2.3%)
5,093
(+4.1%)

 

Increasing ultralarge vessels and cascading aggravate oversupply to market

On the supply side, ultralarge vessels’ continuous entry into the market is aggravating oversupply. Especially, the cumulative number of ultralarge vessels of minimum 18,000 TEU was estimated to be 35 in 2015, 48 in 2016, 73 in 2017, 106 in 2018, and 111 in 2019. Furthermore, the tonnage of delivered vessels of minimum 12,000 TEU is estimated to be 800,000 TEU in 2015, 500,000 TEU in 2016, 600,000 TEU in 2017, 320,000TEU in 2018, and 90,000 TEU in 2019. Due to such large cumulative tonnage of ultralarge vessels, oversupply is not going to be eliminated or alleviated for the time being.

Besides, the completion of Panama Canal expansion is expected to trigger cascading chain reaction. Particularly, we expect the full-swing transfer of 8,000 TEU to 10,000 TEU vessels from European to North American routes. This will in turn trigger cascading from North American routes either to North/South routes or to intra-Asia routes, further aggravating the oversupply to entire container shipping market.

<Number of delivered ultralarge vessels of minimum 18,000 TEU by alliance>

2015 2016 2017 2018 2019 Total
2M 26 11 10 4 - 51
O3 9 2 3 12 - 26
CKYHE - - - 17 5 22
G6 - - 12 - - 12
Total 35 13 25 33 5 111

 

Balancing demand and supply unlikely in the short term

For next several years, demand and supply is not likely to be balanced for the ocean shipping market. Moreover, it is not likely that the tonnage of ordered and delivered ultralarge vessels of minimum 18,000TEU will remain at its currently verified level. It seems that those carriers which belong to shipping alliances have no choice but to get ultralarge ships. Therefore, even when the tonnage of dismantled vessels is taken into consideration, demand and supply for the ocean shipping market isn’t likely to be better balanced than now.

However, there is a chance that demand and supply will be better balanced in 2019, provided that the number of ordered vessels does not increase beyond its current level while demand continues to grow at the current rate. This means that one cannot expect recovery of freight rates until 2019.

 

New strategy other than cost reduction is necessary

Mindful that depressed market is likely to continue for an extended period, global container carriers need to explore new strategies instead of sticking to their current business strategy. Cost reduction should no longer aim at no place left to squeeze. Now is the time to reduce costs with a ship operating system that taps into eco-ship and ecotechnology.

Moreover, we must act urgently to edit the current business portfolio that focuses on North American and European routes. Attention must be given to the fact that Maersk and others, which have run a surplus in the face of depression, have done so by appropriately taking advantage of the strengths of the trunk-and-feeder system.

 

 

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 277

Supply, Not Demand, to Decide Container Cargo Rates

Supply, Not Demand, to Decide Container Cargo Rates

This year, container freight rates have been dropping. Freight rates for European routes, which began on 9th January at 905 dollars per TEU for cargo originating from Shanghai, dipped below 300 dollars per TEU for three weeks in June and three weeks in October, thus registering a price that is the lowest ever in history. Rates for North America routes have dropped continuously with the US West Coast registering 1,930 dollars per FEU on 9th January and 1,166 dollars on 23rd October and the East Coast charging 4,500 dollars per FEU on 1st January and 2,163 dollars on 23rd October.

Freight rate trend for East/West routes

Freight rate trend for East/West routes (Source: Shanghai Shipping Exchange)

 

Causes for falling freight rates for East/West Routes: Oversupply

Two things are suggested as the causes for the steadily falling freight rates for the trunk routes between East and West. One is the forecast that East/West routes will see a sharp increase in supply, with delivery of ultralarge vessels of minimum 18,000 TEU, which started in 2013, culminating this year and continuing to increase sharply until 2019.

This will greatly increase the supply of ultralarge vessels to East/West routes. The delivery of ultralarge vessels of minimum 12,000 TEU was 480,000 TEU in 2013 and 640,000 TEU in 2014, and will be 810,000 TEU in 2015, 500,000 TEU in 2016, and 600,000 TEU in 2017. Namely, as the delivery of ultralarge vessels climaxes this year, it was a foregone conclusion that freight rates would fall for East/West routes.

If we look at the increase in world container ship capacity since 2012, it culminates with an increase of 7.6% in 2015. Especially, ultralarge vessels of minimum 12,000 TEU register an annual average growth of 25.9%, suggesting that the sharp increase in ultralarge vessels is a major cause for the increasing global supply of container ships. We should note that since the increase of ultralarge vessels can trigger a cascading chain reaction, actual increase in supply is larger than the growth as shown on the table below.

Global container ship tonnage trend by size

Global container ship capacity trend by size (1,000 TEU, Source: Clarkson)

 

Causes of falling freight rates for East/West Routes: Slowdown in demand (cargo volume)

Another reason for this year’s continued drop in container freight rates is the slowdown in demand. This year, freight rates have continuously fallen for European routes due to slowdown in export cargo volume with the slowing Chinese economy and delayed economic recovery in Europe. In contrast, the North American routes register stable growth in demand as the US economy is recovering.

<Cargo volume trend for European routes and North American routes>

Europe North America
Throughput
(1,000 TEU)
Growth
(%)
Throughput
(1,000 TEU)
Growth
(%)
2011 14,191 5.3 13,144 0.4
2012 13,520 -4.7 13,378 1.8
2013 14,176 4.9 13,838 3.4
2014 15,396 8.6 14,652 5.9
2015
(Jan~Aug)
9,957 -4.7 10,037 5.0

(Source: Japan Maritime Daily)

 

Especially China has shown drastic slowdown in cargo volume for both routes compared to last year. Cargo volume for European routes increased 6.6% last year while decreasing 4.1% by August this year. For North American routes, it grew by 6.3% while increasing only 2.3% by August this year.

<Out-of-China export cargo volume trend for European routes and North American routes>

China-Europe China-North America
Throughput
(1,000 TEU)
Growth
(%)
Throughput
(1,000 TEU)
Growth
(%)
2011 9,921 5.0 8,114 -2.0
2012 9,530 -3.9 8,234 1.5
2013 10,163 6.6 8,496 3.2
2014 10,860 6.9 9,030 6.3
2015
(Jan~Jun)
5,093 -4.1 4,316 2.3

(Source: Clarkson, Zepol)

 

Slowing demand growth has supply exercise growing influence on freight rates

Despite the recovery in the US economy, demand for maritime container transport will register a long-term low growth, in that low growth has been established with slowing Chinese economy, the delayed recovery of European economy, and the lowering economic growth in emerging economies. This means it is alright to regard the low-growth demand as a fixed factor for the container market.

Talking about future container cargo market, we will have to regard supply, not demand, as the factor that decides the freight rates especially for European or North American routes. In other words, the increasing capacity that focuses on ultralarge vessels seems to point to poor prospects for the freight rates for European and North American routes.

 

 

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 276

Intra-Asia Routes Troubled with Slowing Demand and an Oversupply

Growth in trade and cargo volume in intra-Asia is slowing down

As economic depression continues into the year in major East-Asian countries such as China, South Korea, and Japan, cargo volume in intra-Asia is leveling off. According to the Japan Maritime Daily, the cargo volume in intra-Asia increased by only 1.5% to 14.37 million TEU and this year’s total up to July was 8.56 million TEU, 3.4% up from last year.

Besides, as China disclosed its GDP growth as 6.9%, the country is expected to keep its GDP growing at below 6%. This leads to the forecast that trade growth in intra-Asia will slow down further, which will lead to a slowdown in the cargo volume in intra-Asia, too.

 

More vessels supplied to intra-Asia

Alphaliner forecast that the vessel capacity added to intra-Asian routes was 390,000 TEU as of the end of May, up 22.6% from the same quarter of last year. In the first half of the year, new services were created for 33 new loops (with 98 vessels) owing to falling oil prices, and the upsizing of ships is briskly under way.

Average container ship size on main trade lanes: three scenarios for 2020

Average container ship size on main trade lanes: three scenarios for 2020 (source: OECD/ITF)

If we look at the vessels supplied to the routes in intra-Asia in the second half of the year, we see that 230 more newly-constructed vessels will be delivered by the end of 2015 as compared to 2014, while 150 newly-built vessels will be delivered by the end of 2016 as compared to 2015. Besides, this year will deliver 79 small and medium-sized vessels that are 1,000 to 3,000 TEU, while 2016 will built 75 ships of the same size.

 

Vessel cascading accelerates the growth of vessel capacity

Another cause for the growth in vessel capacity is the increased cascading from European routes North-American routes Intra-Asian routes and North-South routes, which happens from those ultralarge vessels of 10,000 TEU and above being continuously assigned to ocean routes. According to the Japan Maritime Daily, starting from the middle of the year, a series of 4,000 TEU vessels have been deployed to the routes in intra-Asia.

Especially with the completion of Panama Canal expansion approaching in April 2016, we are curious how the existing Panamax container ships will transfer to other routes. The Asia-North America routes have about 160 Panamax container ships operating via Panama Canal, most of which are expected to be replaced with large vessels of 8,000 to 10,000 TEU from April 2016. The Europe-North America routes have 238 Panamax vessels operating via Panama Canal, most of which are going to be replaced with 8,000 to 10,000 TEU vessels. Accordingly, starting in April 2016, those surplus Panamax vessels from Asia-North America and Europe-North America routes will be transferred to the routes in intra-Asia.

 

Market to remain sluggish with demand slowing from depression

The routes in intra-Asia are suffering from an extremely bad business, as they are grappling with the adversities of demand slowdown and intensifying oversupply caused by the depressed economies of China, South Korea, and Japan. If we check average shipping rates for major sea routes up until this October, the average freight rate was 137 dollars/TEU for the China-Japan routes, 171 dollars/TEU for the China-South Korea routes, and 199 dollars/TEU for the China-Southeast Asia routes, registering price drops of 49.8%, 8.6%, and 14.6%, respectively.

Since the routes in intra-Asia are not so likely to see greatly increased demand, it is likely to further intensify oversupply while sluggish business is expected to continue.

 

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 274

 

Delivery of More Ultralarge Vessels Will Likely Increase Contribution to Market Supply

Fleets are expected to shift focus to ultralarge vessels

According to Alphaliner, as of the end of September, there were 316 ultralarge ships that were 10,000 TEU and above which amounted to 4,214,000 TEU, and they accounted for 6.1% of the worldwide container fleet in the number of ships and 21.6% in vessel capacity. As of the end of September, there were 209 newly ordered ultralarge ships that were minimum 10,000 TEU, which totaled 3,146,000 TEU, and they accounted for 42.1% in the number and 74% in vessel capacity of the world’s newly ordered ships.

The fact that the capacity for ultralarge ships that are at least 10,000 TEU takes up 21.6% of the total global vessel capacity while the newly ordered such ships take up 74% of the total worldwide orders, shows that the global container ship market is taking turn toward a predominant fleet of ultralarge ships.

Table 1. Current ultralarge container ships and the portion they take up out of global container vessel fleet
September 2015 Portion(%)
Number
of Vessel
Capacity
(1,000 TEU)
Number
of Vessel
Capacity
Existing 18,000+ 31 578,336 0.6 3.0
13,300~17,999 102 1,463,423 2.0 7.5
10,000~13,299 183 2,172,360 3.6 11.1
Total (10,000+) 316 4,214,119 6.2 21.6
Orderbook 18,000+ 72 1,399,426 14.5 32.9
13,300~17,999 63 902,765 12.7 21.2
10,000~13,299 74 844,620 14.9 19.9
Total (10,000+) 209 3,146,811 42.1 74.0

<source: Alphaliner>
 

Major trade routes will see a pronounced increase in ultralarge vessels

Alphaliner forecast that the capacity for ultralarge vessels which are minimum 10,000 TEU would be 3,345,000 TEU (33% up) in 2014, 4,470,000 TEU (29.7% up) in 2015, 5,344,000 TEU (19.6% up) in 2016, and 6,364,000 TEU (19.1% up) in 2017. Meantime, it forecast that the global container vessel fleet would register an increase of 6.3% in 2014, 9.1% in 2015, 5.4% in 2016, and 4.6% in 2017, thus projecting a very steep rise in ultralarge vessels that are minimum 10,000 TEU.

As the information provider forecast that those ultralarge vessels that are minimum 18,000 TEU would increase by 276.7% in 2014, 137.5% in 2015, 38.2% in 2016, and 55.6% in 2017, we expect a greatly increased supply to major trade lane where ultralarge vessels flock.

Table 2. Ultralarge container vessel capacity trend and growth rate
2014
(1,000 TEU)
2015
(1,000 TEU)
2016
(1,000 TEU)
2017
(1,000 TEU)
18,000+ 276 657 907 1,412
13,300~17,999 1,147 1,603 1,944 2,141
10,000~13,299 2,021 2,210 2,493 2,811
Total 3,445 4,470 5,344 6,364
YoY(%) 33% 29.7% 19.6% 19.1%

<source: Alphaliner>
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As of September 2015, there were 31 ultralarge vessels that were 18,000 TEU and above and 72 ultralarge ships were newly ordered, thus totaling over 100 ships in combination. It is expected that 35 vessels will be delivered in 2015, 13 ships in 2016, 25 ships in 2017, and 30 ships in 2018 and beyond.

Table 3. Year-by-year delivery of ultralarge vessels
Existing Delivery Accumulated
2015 29 6 35
2016 - 13 48
2017 - 25 73
2018 - 30 103

<source: Clarkson, Alphaliner>
 

On the other hand, the capacity for vessels that are 12,000 TEU and above will climax at 810,000 TEU in 2015 and then will register 500,000 TEU in 2016 and 600,000 TEU in 2017. The average size of delivered vessels will be 16,542 TEU in 2015, 16,181 TEU in 2016, and 18,171 TEU in 2017, which suggests that the average size will continue to increase for newly constructed vessels to be deployed on major routes.

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If cascading is taken into account, growth of vessel tonnage is even greater

It should be noted that the growth of vessel tonnage we have surveyed so far does not take into consideration the cascading for different sea routes. When new ultralarge vessels are assigned to major trade routes, smaller vessels previously assigned to those routes are transferred to North-South routes or regional routes. So, we expect an oversupply of vessels not only on East-West routes, but also on regional routes such as North-South routes and East-Asian routes.

By 2019, the world will have up to 103 ultralarge vessels that are minimum 18,000 TEU, and their first assignment will be on European routes. In that case, 10,000 to 12,000 TEU vessels will probably be moved to North American routes. (With the completion of Panama Canal expansion scheduled for April 2016, we expect to see full-swing cascading from Europe to North America.)

 

Name of the game is the supply of vessels to European routes

In the end, cascading will proceed in the order of Europe North America North-South routes Regional routes, which will aggravate the overall oversupply for the global container ship market. So, instead of simply focusing on the growth of supply for different vessel sizes, we should pay attention to the contribution to the entire world market from an increase in ultralarge vessels assigned to European routes, which constitute the top-tier market.

 

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 273